An insider’s look into the world of insider trading

Frontline on Tuesday ran To Catch a Trader, the highly-anticipated in-depth documentary on insider trading, with a particular focus on SAC Capital and its founder, Steven A. Cohen. The hour-long special mostly covered reported material, ranging from the investigation of Galleon Group to the illegal use of expert networking consultants, but the documentary also included some original interviews and new angles. If you couldn’t catch it, here are some of key takeaways and interesting anecdotes.

Insiders can be a pain: Winifred "Winnie" Jiau, a former research consultant with strong ties in the tech sector, was busted sharing proprietary information with an SAC Capital trader Noah Freeman for cash and rather abnormal gifts.

When Jiau asked for more “sugar” – or more money – Freeman had his secretary sent her a gift card to an upscale women’s clothing store. Jiau sent it back, asking instead for $500 gift certificates to the Cheesecake Factory and packages of live lobsters. Freeman jumped through the hoops, and for good reason. He made between $5 million and $10 million trading off of Jiau’s tips. She made roughly $120,000 a year for providing the information. Jiau spent four years in prison. Freeman has yet to be sentenced as he is still cooperating.

Minimal time to think: Former Galleon Group trader Turney Duff picked up a phone call meant for his boss, jailed hedge fund owner Raj Rajaratnam, and a voice on the other end of the phone told him that Jeffries was going to upgrade Amazon in six minutes. That gave him five to decide what to do. He ended up buying 100,000 shares of Amazon and made a half-million dollars in a matter of minutes.

Insane record: In his first seven years running SAC Capital, Steven Cohen’s firm reportedly booked just three losing months. The worst 30-day stretch during that period was a 2% loss. It made sense then that he could charge 50% of customer earnings, compared to the industry-standard 20%.

Stevey is a no-go: If you ever run into Steven Cohen at a restaurant, call him by his proper name. In a deposition for a civil trial filed against SAC by Canadian insurer Fairfax Financial, Cohen talked about the “very vague” nature of insider trading rules and said it’s often a “judgment call” deciding what is public information and what isn’t. Yet, the most interesting part of the deposition involved Cohen’s lawyer, Martin Klotz, and Michael Bowe, the attorney for Fairfax. The conversation went downhill immediately after Bowe referred to Cohen as his friends do.

Bowe: Okay. So the compliance manual — you have authority, Stevey Cohen, to ignore the compliance manual?

Klotz: Object to the form. And I particularly object to the obnoxious, deliberate use of “Stevey” in addressing Mr. Cohen.

Bowe: It wasn’t deliberate. It was a mistake.

Klotz: No, it was intentional.

Bowe: Knock it off. How do you know?

Klotz: Because I know.

Bowe: I know you’re trying to be a tough guy in front of your client, but why don’t you knock it off? I know you’re trying to be tough — defend your big client. I understand that. This was a mistake.

Bowe: I’m sorry I used the word “Stevey” if I offended you.

Cohen: I’m not a big client.

Great lines: FBI agents, surprisingly, had more personality than anyone else who was interviewed. One even offered a few lines that could have been taken from a Hollywood script.

On the art of making contact with those who may be willing to turn over on others, one officer quipped: “We would get behind the person at Starbucks or Dunkin Donuts and when the clerk would ask ‘how do you take your coffee?’ We would answer for them: ‘two sugars and cream – please come with us.’” He also quoted Jaws.

Legal loophole?: Manhattan Attorney General Preet Bharara was rather guarded with his comments, but he showed particular displeasure with the inability under current laws to charge owners of hedge funds – like Steven Cohen, though he refused to get specific – with criminal negligence, even though the legal maneuver is allowed in other courtroom situations, like when prosecuting a drug dealer.

“There are some circumstances in which the facts surrounding the situation are so compelling that even if the person can claim that they never looked inside the package, but they knew they were getting the product from a narcotics dealer and they knew they were delivering it to a narcotics dealer, in certain circumstances, in the narcotics context, for example, the fact that you stuck your head in the sand does not cause you to escape criminal liability,” Bharara said.

When asked if he feels if he will ever see a case where negligence rises to criminal liability in the hedge fund world, Bharara deadpanned: “I doubt it.” Many people, including several of those interviewed for the piece, feel top execs at hedge funds hide blissfully in ignorance when it comes to the source of market-moving information.

Missed many, but others to come: Feds were rather honest about the difficulty of traversing through convoluted wiretapped conversations to identify insider trading, acknowledging that some cases may have fallen through the cracks. “We missed more than we captured,” said one investigator. Bharara warned others could be on tap, though.